Jurate Gulbinas | 14 Jun 2019 | 14 min read
What is a CFC?
A CFC is a foreign corporation in which more than 50% of the shares are held by US Shareholders. US Shareholders are shareholders in a foreign corporation that own more than 10% of the total voting or value of shares on issue in such foreign corporation.
What is a PFIC?
A PFIC is a passive foreign investment company. A passive foreign investment company is a company that derives at least 75% of its gross income from passive sources that are not regular business activities, or at least 50% of the company’s assets produce income that is passive.
What is a grantor trust?
A grantor trust is a trust (whether domestic or foreign) of which the grantor is considered the owner of the trust assets income and losses for US tax purposes. In the context of a foreign trust any income, gains or losses that are derived by the trust are attributed to the grantor and taxable to them in the US regardless of who they are distributed to under the laws of the foreign country.
What is GILTI?
Global Intangible Low Tax Income is income that is derived by a controlled foreign corporation that is not Subpart F income that is taxed at a rate of not more than 95% of the US Corporate Tax rate of 21%.
What is BEPs?
BEPS means Base Erosion and Profit Shifting. The G20 BEPS initiative was implemented to allow the global community to fight large scale tax avoidance through profit shifting.
What is transfer pricing?
Transfer pricing is the price at which divisions of related party companies transact with one another.
What are the check the box regulations?
The check-the-box regulations establish how a foreign or domestic entity should be taxed in the US (i.e. as a disregarded entity, a partnership or a corporation). All entities have a default status. If an entity is an ‘eligible entity’ that can also choose to an alternate tax status.
Is superannuation taxable in the US?
i. The US Australia Income Tax Treaty predates the introduction of the Superannuation Guarantee in Australia.
ii. It was designed to deal with the old form of defined benefit plan that had one taxing point, which was on distribution not the three taxing point system that exists today. If you compare the US Australia Income Tax Treaty with the US UK Income Tax Treaty you can clearly see the gaps.
iii. To the extent that the treaty is silent to the manner in which a type of income should be taxed it will be taxed under domestic law.
iv. The two sections of the International Revenue Code of 1986 that can tax Australian superannuation are sections 409A or 402(b) IRC. To say there is a one size fits all model when it comes to the US taxation of Australian super is a bit like saying that Russia did try and influence the US election. In case it is not clear I am saying that there simply is not one model that suits all circumstances and the reason for that is set out below.
v. Section 409A governs non qualified deferred compensation plans and 402(b) governs non exempt employee trusts.
vi. If you apply section 409A to your super you treat it as social security and you exempt it from US taxation under Article 18(2) of the US Australia Income Tax Treaty. You have found a big red bow and tied it around this issue. You are wining.
vii. However, here is the rub. In order to classify your super as social security you need to have the protection of the US Australia totalization agreement and this agreement only cover contributions that are mandatory contributions that have been made by employers on behalf of their employees under the superannuation guarantee system.
viii. I can understand the rationale for that. The guarantee does bear some similarity to social security. However, for most Australians their superannuation is more complex than that. Most employees have in addition to the guarantee amounts, made further taxed and non taxed contributions to their accounts.
ix. Furthermore, many other Australians that do not hold their superannuation in a retail accounts are owners of self managed superannuation funds. When you look at legislation and verbiage of section 409A it feels like it should have application to a retail superannuation account and not a self managed superannuation fund and the legislation and verbiage of 402(b), feels like it would have application to a self managed superannuation fund and not a retail account.
x. The big issue here is that if a superannuation benefit is not protected by the Treaty under Article 18(2) or Article 18(1) you need to apply the domestic law that is applicable to your circumstances and just because section 409A has some application to your circumstances does not mean you should not consider or apply section 402(b) to your circumstances. This applies for both retail or self managed superannuation funds.
xi. You need to be mindful of the position you are taking and the risks associated with getting it wrong.
xii. If your benefits are taxed under section 402(b) rather than 409A the taxation and information reporting consequences are dramatically different. One is not taxed and the other is taxed as ordinary income. If you are reporting your benefits under section 409A you do not have an obligation to report your benefits on a Fincen 114 (Fbar) or 8938 whereas if your benefits are taxable under section 402(b) you do have an obligation to report the benefits on those forms.
xiii. These forms carry substantially penalties if they are completed incorrectly or they not completed at all and should be.
xiv. Whenever I see one outcome that is all gravy and another that all hellfire I step back and ask myself what is the catch.
xv. When it comes to super there is no silver bullet. You need to understand the issues and apply them to your circumstances in way that suits your tolerance for risk.
How do double tax agreements work?
Double Tax Agreements are conventions signed between 2 countries that override domestic law to ensure that an individual or entity formed in a particular country is not taxed twice on the same income.
What is a permanent establishment and why should I know about it?
A permanent establishment is the cornerstone of business taxation as determined by double tax agreements. If a business that is resident of a particular country with which the US has a double tax agreement does not have a permanent establishment in the US, it cannot have a liability for federal taxation in the US.
How does state income tax work?
In the US, state income tax laws are administered and levied separate to the Federal tax laws enforced by the Internal Revenue Service (IRS). Each state applies their own tax system when can often create confusion and complexities for both individuals and businesses alike as the state tax rules can vary widely.
For companies doing business in the US, you can create a state corporate income tax liability where you have triggered a sufficient connection or “nexus” with a state. The state income tax is generally based on the business income of the corporation attributable to activities and revenue generated from activities within such state. Again, each state has different rules on what will amount to a taxable nexus. Some examples of nexus include attending trade shows, warehousing, having staff resident in a particular state or where the business server is located.
More recently we have seen a spike in queries regarding whether a state income tax nexus has been created by selling products on Amazon FBA. Products are often warehoused in states before being sent to the purchaser. This can create a state income tax nexus for sellers on Amazon FBA which may require state income tax and other registrations to be made.
Anyone doing business across more than one state should ensure that they have an understanding of their state tax requirements to ensure they are compliant with state business and tax requirements.
How does state sales tax work?
Much like state income tax, sales tax is governed by each individual state and is separate to the federal tax system. The result of this is that anyone doing business in the US can often find themselves trying to navigate through the sales tax rules of each state. This can get clear as mud.
You are required to collect sales tax from customers or buyers in any state in which you have a sales tax nexus. A sales tax nexus is created when you have a certain level of connection to the state. The criteria for creating a sales tax nexus is different in every state, however having a physical presence in a state will most likely create a nexus. In certain states, making sales exceeding a certain revenue amount or making a certain number of transactions in a state can create a nexus. If you have a sales tax nexus, you are required to register for a sales tax permit in that state.
The sales tax rate you are to collect will vary on whether you are based in an origin-based sales tax state, or whether you have created a sales tax nexus in a destination-based sales tax state. If you are based in an origin-based sales tax state, generally you charge the sales tax rate of the state in which you are located on all sales. If you have a sales tax nexus in a destination-based sales tax state, you collect sales tax based on the where the buyer is located.
What are the tax consequences of arriving in USA and becoming tax resident?
The consequence of becoming a U.S. Person (a U.S. tax resident) is that you are taxed on your worldwide income. That is income and gains sourced anywhere in the world are taxable in the U.S., subject to reduction by foreign tax credits or exclusions.
What is the minimum time I can remain in USA without being tax resident?
The U.S. is one of only two countries in the world to tax extraterritorially, that is to tax its citizens and permanent residents (Green Card holders) on their worldwide income regardless of how much time they spend in the country. So if you are a citizen or you hold a Green Card you are taxable on your worldwide income even if you spend 0 days within the U.S. in a calendar year. If however, you reside in the U.S. on a non-immigrant visa, you need to apply the Substantial Presence Test to your circumstances.
The Substantial Presence Test determines if you are physically present in the US at least 31 day during the current year and 183 days during the 3-year period that includes the current year and the previous two years by applying the following formula:
Days in U.S. in current year x 1 (Year 1) + Days in U.S. in year immediately preceding current year x 1/3 (Year 2) + Days in U.S. in year preceding the Year 2 (Year 3) x 1/6;
If you exceed the minimum 183-days under this formula, then you will be a resident for purposes of U.S. tax law.
Students, teachers and trainees are exempt from substantial presence test. Please contact our office regarding more details.
Does USA tax its residents on a world wide or territorial basis?
The U.S. taxes on a worldwide and extraterritorial basis.
Is foreign income taxable in USA e.g. foreign rental income, foreign interest income and foreign dividend income?
Yes, foreign sourced income is taxable in the U.S., subject to reduction by foreign tax credits and exclusions.
Does USA tax on a remittance basis?
No, the U.S. does not have a remittance basis of taxation.
Does USA have a sales tax or VAT tax on purchases?
Yes, the U.S. does have a sales tax on the sale of goods. Sales tax rate is determined by the state and local governments and thus varies from 5.5% to 9.45%. California state sales tax rate is 8.41%. Few states do not have sales tax.
Does USA have a capital gains tax that taxes me when I sell foreign assets?
Yes, the U.S. taxes its residents on gains realized on the sale of foreign assets.
Does USA have an estate tax or death tax?
Yes, the U.S. has an estate tax.
What is the top tax rate in USA?
Currently highest federal tax rate is 39.6%. The highest state rate of tax in California is 12.3% and 8.82% in New York.
Does the tax rate vary for different types of income and if so what are the rates?
Yes, long term capital gains (gains realized upon the sale of an asset that has been owned for 12 months or more) are taxed at the rate of 20%, as are qualified dividends. All other forms of income are taxed at full tax rates.
What are the common tax deductions available in USA?
Passive property losses (negative gearing) are deductible if you earn less than $100,000. If you earn between $100,000 and $150,000 the losses are partially deductible. If you earn more than $150,000 the losses are not deductible currently but may be carried forward and offset against future passive income or capital gains. Contributions to qualifying pension plans are deductible provided they do not exceed statutory limits. Home mortgage interest on up to $1M of debt for your principal residence is deductible as is property tax. Contributions to Health Services Accounts are deductible.
Does USA require joint tax returns to be filed for me and my spouse or are separate tax returns required?
Married taxpayers usually file married joint tax returns. Married separate tax returns may be filed as well.
If I have a foreign company or foreign trust before I arrived in USA is the income of that company or trust taxable?
If the trust is a grantor trust or the company is a controlled foreign company and the income it derives is Subpart F income, the income will be taxable in the U.S., even it is earned in another country. Most European and English common law trusts are grantor trusts.
Do children under 18 pay a higher rate of tax on certain types of income?
Yes, there is a so called “Kiddie” tax in the U.S.
Is there a gift tax in USA?
Yes, there is a gift tax in the U.S. 2014 annual exclusion gift amount is $14,000.
What are the personal tax exemptions in USA e.g. a gift from an overseas relative or a foreign insurance payout?
Most earned and passive investment income in taxable in US, however there are types of receipts that are excluded from taxable income. Examples are life insurance proceeds received by the qualified beneficiary, tax-exempt interest, property acquired by bequest, devise, or inheritance.
If I receive shares as part of my salary is this taxed in USA?
Yes, compensation received via the issuance of shares is taxable (in the year of the grant or later, depending on type of the grant) in the U.S.
When I leave the country is a ‘termination payment’ taxed by USA before I leave?
Yes, if a termination payment is received in consequence of the termination of employment in the U.S., the income derived will be sourced to the U.S. and taxable in the U.S.
What are other tax consequences of leaving the country?
Since the United States taxes its citizens and residents on their worldwide income, the only way to avoid paying U.S. tax is to expatriate or terminate residency.
If you are a “covered expatriate”, you might be subject to income tax on the net unrealized gain as if all property that you had as of the day before the expatriation or residency termination has been sold for its fair market value. Any net gain on the deemed sale is recognized to the extent it exceeds $680,000 (2014 exclusion amount).
With certain exceptions, “covered expatriates” include U.S. citizens who relinquish their citizenship or certain long-term U.S. permanent residents who terminate their residency if such individuals: (a) have relatively high tax liability (a 5-year average income tax bill of at least $147,000, adjusted annually for inflation thereafter); (b) have relatively high net worth ($2 million or more); or (c) either have not certified under penalties of perjury that they have complied with all U.S. federal tax obligations for the previous five years or have not submitted the requisite evidence of compliance.
Are there any tax consequences of me transferring money from USA to my say home country?
While, the transfer of money from one country to another does not carry a tax consequence, the exchange of one currency for another (i.e. USD for AUD) is a taxable event.